Caroline Ellison with courtroom background

Sam Bankman-Fried’s lawyers botch cross-examination of Caroline Ellison

Try as they might—and they weren’t trying all that hard—attorneys representing Sam Bankman-Fried (SBF) didn’t lay a glove on Caroline Ellison during her appearance at her former boss/paramour’s criminal trial.

Thursday saw a full day of cross-examination for Ellison, ex-CEO of Alameda Research, the market-maker for SBF’s FTX digital assets exchange. SBF’s legal team had no shortage of material to work with, as prosecutors had coaxed a series of jaw-dropping revelations during their direct examination of Ellison.

Wednesday’s juiciest moments included Ellison relating how, in November 2021, SBF directed Alameda staff to pay $150 million—nearly 4x the $40 million previously described in the Department of Justice’s (DOJ) superseding indictment of SBF—to unspecified Chinese government officials to unfreeze around $1 billion in digital assets that were trapped on two China-based exchanges (Huobi and OKX).

This elaborate process—which also included Alameda’s other co-CEO Sam Trabucco—involved using the IDs of “Thai prostitutes” to open new accounts on Huobi/FTX to try to unstick the stuck assets. This episode was later obliquely referred to as ‘the thing’ on FTX/Alameda’s internal documents.

Ellison also claimed that SBF directed her to prepare as many as seven different versions of the infamous Alameda balance sheet that was later leaked and sparked FTX’s downfall. Incredibly, the version that leaked actually understated Alameda’s liabilities by billions of dollars.

One of these balance sheets was sent to Genesis Global Capital, the ‘crypto’ lending arm of Barry Silbert’s Digital Currency Group (DCG), a major Alameda creditor. SBF allegedly warned Ellison not to send an accurate balance sheet to Genesis based on fears that the lender might (a) call in its loans if it knew the dire state of things or (b) leak the information. Genesis has previously been flagged as a possible leaker of the balance sheet it received from Alameda, which was selected by SBF from the seven versions Ellison prepared.

Ellison testified that SBF had related a conversation he’d had with Matthew Ballensweig, Genesis’ then-managing director. Ballensweig allegedly told SBF that Genesis’s lending partners wanted their money back and Genesis ‘might go under’ unless Alameda returned $500 million of the money Genesis had lent Alameda. (The money was sent—part of a total of $4 billion in loans and collateral Genesis managed to successfully extract from Alameda—but Genesis still went bankrupt shortly after FTX did.)

Ellison also related how, as FTX’s financial situation worsened, SBF plotted ways of “getting regulators to crack down” on rival exchange Binance. In addition to SBF having a grudge against Binance founder Changpeng ‘CZ’ Zhao, SBF believed a crackdown might leave Binance’s customers adrift, creating an opportunity for FTX to acquire them—along with their digital assets and thus paper over the holes in FTX/Alameda’s books.

Finally, as the good ship FTX was floundering, SBF came up with a plan to raise $1 billion in additional capital from Saudi Arabia’s Crown Prince Mohammed bin Salman (MBS). Given MBS’s role in the murder of Washington Post journalist Jamal Khashoggi, SBF can count his lucky stars that he didn’t end up stiffing the vengeful monarch.

SBF’s team isn’t sending their best

As live-tweeted by Inner City Press, SBF’s team began their Thursday grilling of Ellison with a meandering series of questions regarding her co-workers and the nature of the business.

As on previous days in this trial, a weary U.S. District Court Judge, Lewis Kaplan, admonished SBF’s attorneys to stop asking questions that prosecutors had already asked various witnesses. Kaplan also informed SBF’s attorney, Mark Cohen, that he’d “never seen the cross of a cooperator done like this.” It’s been suggested that SBF is already angling for a mistrial based on (a) Kaplan’s hostility or (b) the ineptness of his own counsel. At this point, our money is on the latter.

On Wednesday, Ellison revealed that by June 2022, Alameda had borrowed 77% of all FTX customer deposits for its own purposes, including 52% of all ETH held on FTX, 44% of the USDT (Tetherstablecoin and 25% of the BTC. Alameda also claimed all Australian dollars and BRZ (a token linked to Brazil’s fiat currency).

On Thursday, Ellison was presented with a document apparently detailing an internal conversation in which she suggested to another staffer that SBF “might not have known” about the extent to which Alameda had ‘borrowed’ FTX customer funds. Prosecutors objected to the vagueness of this statement, suggesting it needed further explanation, but SBF’s team simply dropped the matter and moved on to its next line of inquiry.

Ellison also revealed that Alameda lost $100 million when Terraform Labs’ algorithmic stablecoin UST and LUNA token abruptly tanked in spring 2022 (ultimately leading to the demise of SBF’s empire and much of the broader ‘crypto’ sector).

How many martinis did they have?

Following a lunch break, SBF’s team continued its scattershot approach, quizzing Ellison on numerous issues but never drilling down deep enough into any one subject to land any serious blows.

Before FTX went belly-up, SBF invested $400 million into Bahamas-based hedge fund Modulo Capital, which was run by another of SBF’s ex-girlfriends. In a document shown in court, SBF told execs at both Modulo and Alameda to quit bickering with each other. SBF reminded them that they should be “always doing what is best for the company,” implying that Alameda, Modulo, and FTX were a single entity. SBF added that they should be “treating all dollars the same,” whether those dollars belonged to Alameda, Modulo, or FTX (or its customers).

On Thursday, Ellison was asked if it was true that she wanted to “crush” Modulo, and she said she remembered “having feelings like that.” Ellison said she “didn’t think it made sense” for FTX to be investing $400 million in Modulo.

The court previously heard that, toward the end, SBF had considered shutting down Alameda and having Modulo take its place. It’s almost as if SBF’s team is now trying to make Ellison out to be a scorned woman who’d tank the whole operation rather than see her ex make goo-goo eyes at another woman. In reality, SBF’s team is likely convincing the jury that his people skills are even worse than they suspected.

Prosecutors conducted a brief redirect, including asking Ellison whether she believed FTX collapsed as a result of Binance’s CZ tweeting his intention to unload all of his FTT (FTX’s illiquid in-house token) following the leak of that Alameda balance sheet. Ellison said the tweet “contributed” to FTX’s downfall, but “the main reason was Alameda borrowing $10 billion from FTX it couldn’t repay.” (Rimshot!)

Ellison’s appearance was followed by former Alameda engineer Christian Drappi, who didn’t offer much significance to either side during his few minutes on the stand. Drappi was followed by Zac Prince, founder/ex-CEO of digital asset lender BlockFi, which went bankrupt last November despite SBF pretending for a while to be its white knight. Prince had only just sat down when Judge Kaplan called time, meaning the world would have to wait until Friday to hear his story.

FTX hackers Russia-based?

As SBF’s trial approached, blockchain sleuths observed significant movements in the hundreds of millions of dollars worth of tokens that were ‘hacked’ from FTX in the immediate aftermath of its bankruptcy. In late September, wallets linked to the ‘FTX Exploiter’ that had lain dormant for nearly a year suddenly began moving significant quantities of ETH. By October 6, around $124 million worth of this ETH had been swapped for BTC and moved off-chain.

Shortly after the FTX hack, some of the stolen assets were observed flowing into ChipMixer, an online tool that obfuscates the history of tainted tokens by mixing them with tokens with a more ‘clean’ history. ChipMixer was taken down in March following a joint operation by German and U.S. authorities after helping to launder around €2.73 billion over its six years of operation.

On Thursday, CoinDesk reported that Elliptic analysts believed that “significant amounts” of the FTX tokens had been “combined with funds from Russia-linked criminal groups, including ransomware gangs and darknet markets, before being sent to exchanges.”

Cleanup in aisle four

The November 2022 hack wasn’t the first time SBF’s operations had been compromised for millions. In August, former Alameda engineer Aditya Baradwaj began something of a public confessional on his Twitter/X feed, relating his initial experiences working at Alameda when it was still based in Berkeley. Baradwaj noted a distinct pattern of “irresponsibility” at Alameda, including “careless risk management for a company handling billions of dollars in capital.”

Baradwaj detailed a number of these embarrassing shortcomings, leading to a thread this week on Alameda’s “poor security practices” that led to the loss of “hundreds of millions of dollars.” This included an Alameda trader clicking on a phishing link while trying to complete a decentralized finance transaction that cost Alameda “$100M+.”

An attempt at “yield farming on a new blockchain of questionable legitimacy” led to the blockchain creator “holding our funds hostage,” resulting in a “$40M+” loss. Another incident was “likely” sparked by a former employee leaking an “old version of our plaintext keys file” that allowed an attacker to transfer funds without authorization, with the damage estimated at “$50M+.”

Baradwaj claimed these cockups were largely the result of SBF prioritizing speed of action over security. This meant “virtually no code testing and incomplete balance accounting[.] Safety checks for trading would only be added on an as-needed basis[.] Blockchain private keys and exchange API keys were stored in plaintext in a file that several employees could access”.

Even after nearly $200 million in losses, Baradwaj said SBF appeared to take it as the cost of doing business, given that there was “no serious attempt was made to change the way we operated.” It’s almost as if SBF’s whole ‘boy genius’ schtick was a fraud. Funny, that.

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